In fact, most countries are cutting public expenditures with the IMF s support.

Interest rates were slashed, insolvent banks were bailed out, the printing presses were turned on, taxes were cut, and public spending was boosted.

The political right calls for more rapid deficit reduction by cutting spending.

Europe s Myopic Defense Cuts

Cutting spending now will weaken the economy.

But when the economy is booming, the effects of fiscal retrenchment are unlikely to be damaging.

This, by contrast, implies a need for retrenchment.

Instead, they have cut back on spending.

Cut spending, it was said, and inflation would fall.

The response is centered on a payroll tax cut, which will be offset by spending cuts and a higher value added tax.

Their leaders in Congress are already declaring that they will slash public spending in order to begin reducing the deficit.

The reduction of military spending has long been an issue in Greek politics.

Meanwhile, state governments, seeing revenues fall as a result of lower taxable incomes last year, are cutting back like mad.

There is now convincing evidence that the same decision to cut public spending can have very different consequences, depending on economic conditions.

Technically, reducing a deficit is a straightforward matter one must either cut expenditures or raise taxes.

The old orthodoxy held that one had to cut the deficit raise taxes or cut expenditures to restore confidence.

Absent private spending, budget cuts will only depress tax revenues, requiring additional budget cuts, without end.

There would be more reason to reduce taxes in Norway, for example, than in Latin America, where the general course would be to increase spending.

The task is made more complex by the large number of legislators who insist that the deficit should be reduced by spending cuts alone.

Our UNICEF survey of 126 developing countries found that among the nearly one half that are reducing public expenditures, common adjustment measures include public sector wage cuts or caps, withdrawal of food subsidies, and the targeting and rationalization of already meager social protection systems.

Adjustment of public expenditures raises the risk of a recovery that discriminates against the poor, and thus fuels greater inequities in developing countries.

There has been much discussion of how to cut government spending, but too little attention has been devoted to how to make government spending more effective.

Government can either spend more money itself, or try to stimulate private spending by cutting taxes or lowering interest rates.

The third and most damaging flaw, however, is that the spending cuts come in the wrong places.

Public spending cuts come more naturally to Conservatives, and they have despite their lack of candor attempted to make a virtue out of this necessity.

Defense cuts are also happening at a time when Europe, for the first time in modern history, has been overtaken by Asia in terms of total defense spending.

There are two ways to reduce the government s health care outlays reduce the amount of health care the government buys, or reduce the cost of health care.

They have typically assumed that to cut public spending by a dollar would reduce GDP by 50 cents in the short term according to Blanchard, the true outcome in current conditions is a decline by between 0.90 1.70.

Making room for increased consumer spending requires reducing the level of exports by allowing the currency to appreciate.

In some countries, lower military expenditures and interest rates has helped to improve a weak fiscal position.

A one dollar spending cut was believed to reduce GDP by more than one dollar, so that fiscal retrenchment was economically costly (while, conversely, stimulus was effective).

The measure s second shortcoming, however, is that the spending reductions that it mandates are modest.

That case is strongest if the spending reductions are large and abrupt in a weak economy.

Foreigners cannot vote for the higher taxes or lower expenditure needed to service the debt.

If the government tries to cut its deficit, households and firms will have to tighten their purse strings, resulting in less total spending.

They account for half of public spending.

Many governments increase spending excessively in booms, and then are forced to cut back in downturns, thereby exacerbating the cyclical swings.

Democrats oppose most nondefense spending cuts, arguing that reductions would cause the economy to contract.

So there is little choice but to cut welfare spending, at least moderately.

Interest rate cuts can boost borrowing and thus spending on investment and consumption.

But, they fear that calling for spending cuts will be unpopular, unlike, they hope, demands to balance the budget.

The reasoning seems to be that growth requires market confidence, which in turn requires fiscal retrenchment.

Or public spending all European leaders adamantly want to reduce government spending.

Overspending countries are now retrenching, owing to the need to reduce their private and public spending, to import less, and to reduce their external deficits and deleverage.

Cut public sector spending directly, while creating incentives to induce lower private sector expenditure.